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Abenomics -- an escape route from land scandal

Bold reforms offer Abe chance to change news agenda and recover support

| Japan
Going back to economics, the source of Prime Minister Shinzo Abe's popular support.

Donald Trump's embattled presidency can revel in at least one piece of good news: He is no longer the most unpopular leader among Group of Seven peers. That dubious honor falls to Japan's Shinzo Abe, whose domestic numbers are deep in the 30-40% range.

Prime Minister Abe's standing has plummeted as a year-long cronyism scandal reemerges, raising fresh questions about his political survival. The dust-up over the sale of public land at a deep discount to a school company with ties to Abe's wife has investors questioning something bigger: Can Abenomics endure?

Indeed, the Nikkei Stock Average and yen have grown more volatile amid calls for Abe's resignation. The worry is that a weakened Abe administration lacks the political capital to loosen labor markets, cut bureaucracy, spur innovation and empower women. But what if the opposite is true? The scandal might refocus Abe on restructuring the economy as a way of rebuilding public trust.

Those arguing that a weakened Abe will find it harder to deliver forget why voters put him in office in December 2012. After a whirl of prime ministers, one less effective than the previous one, the electorate embraced Abe's economic-revival message. His three-point plan to fire monetary, fiscal and deregulatory arrows at deflation resonated.

By April 2013, moves to impose international standards of corporate governance, drive down the yen via massive Bank of Japan easing and bold "Japan is back" rhetoric pushed Abe's public support rating as high as 76%. But then, he pivoted to pet issues outside the scope of his economic mandate. Abe used his popularity and majorities in both houses of parliament to pass government secrets and conspiracy bills. Next, he went all-in on revising the pacifist constitution.

This about-face in priorities helps explain why the second-longest postwar expansion is not fattening paychecks. In 2017, remember, real wages fell 0.2%. Abe essentially gambled (and lost) that corporate icons from Toyota Motor to Nintendo would share profits with workers. But executives, it is now clear, are sitting on rising mountains of cash and waiting for Abe's deregulatory big bang before making their own wagers on stronger growth.

It should be clear, too, that Tokyo has been more lucky than right. A competitive exchange rate dovetailed with a synchronized global recovery. Heady demand from the U.S., China and even Europe sent economic tailwinds Japan's way. Now, of course, headwinds are emerging. The yen has rallied more than 6% this year, while U.S. President Trump is doing his worst to spark a trade war, not least with his China sanctions package last week. Once exports slow, Japan will be left with the same aging demographics, rigidities and unsustainable public debt burden that faced Abe's predecessor Yoshihiko Noda.

The point is less that Abe is weak and, therefore, cannot deliver on restructuring. He is vulnerable, I would argue, because he has not. The good news is that Abe now has every incentive to pivot back to the economy -- back to the source of the voters' decision to give him a second go as leader.

Abe can do that by, first, prodding Taro Aso to resign. If Abe is to survive the Moritomo Gakuen scandal, he needs to serve up a sufficiently painful sacrifice. Aso's Ministry of Finance is at the heart of the latest scandal news cycle -- doctored documents -- and would do nicely.

Next, Abe should name a more dynamic finance minister -- perhaps a woman, befitting Tokyo's gender-empowerment rhetoric. He also should do what he has so far refused: release specific plans and timelines for economic reforms. Abe could decree that April will be "womenomics" month and roll out policies with real teeth. Why not threaten quotas or hefty fines on companies that fail to promote more women into executive suites? Abe's team could propose caps on the ratio of new female hires getting "non-regular" jobs that pay less.

May could be labor-upgrade month. Abe's team could propose incentives to offer more flexible work schedules. It could step up efforts with the Japan Business Federation to scrap fossilized practices like seniority-based pay and promotions. Japan Inc. could be encouraged to stop doing virtually all out-of-college hiring on the same day. That disincentivizes young Japanese from studying abroad or starting a business. For many, the risk of missing recruiting day is just too great.

Abe's team could telegraph revolutions to follow. They could include a new tax regime for entrepreneurs. If you start a company today and meet certain metrics, you pay a 5% corporate tax, or thereabouts, for a few years. Tax incentives -- or penalties -- could be proposed for cash-rich companies sitting on around $2.7 trillion that could finance wage gains.

Tokyo could get more serious about corporate responsibility. The U.K.-style stewardship code introduced in 2014 was a good start. Return on equity also is increasing. But Abenomics has been no match for a spate of quality-control transgressions from Kobe Steel to Mitsubishi Materials to Takata. Abe's team could encourage Japan Inc. to reduce cross-shareholdings, lower takeover defenses and end the practice of bureaucrats scoring cushy post-retirement posts.

Greater emphasis also should go toward importing more foreign talent and on long-term visas. Why not, too, devise new training programs and school curricula to encourage greater risk-taking? Government-funded venture capital schemes could be planned to augment Japan's rather paltry private-sector offerings.

Yes, Japan likes its change very slow. Sure, there are armies of bureaucrats ready to stymie any wholesale effort to take on vested interests. But voters turned to Abe 1,916 days ago to restore some of Japan's 1980s swagger. He has put a few singles on the scoreboard, but no real home runs. This rather cautious play drove down his support even before the Morimoto story returned to the headlines.

Abe's best chance at redemption is finding his reformist swing and reconnecting with the reason voters gave him a second shot. It also might help Tokyo's standing in the Trump era. Nothing impresses Trump like success. Abe morphing Japan into more of a turnaround story than a cautionary tale would do more than get Trump's attention. It might improve Japan's negotiating position with a White House seeking a bilateral trade deal.

Among Abe's wiser moves has been preserving the Trans-Pacific Partnership after Trump withdrew. Abe could prod the other 10 remaining members to add heft to the grouping by lobbying South Korea, Indonesia and the Philippines to join. Perhaps extend an olive branch to India, too.

Politicians are skilled at changing the subject in moments of crisis. In Abe's case, though, pivoting to the economy would be a return to basics. And the best way for his government to reflate its approval numbers.

William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.



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